NOTE ON CURRENCIES/FOREIGN EXCHANGE FIRST PART - DEFINITIONS Exchange rate The exchange rate between two currencies is the number of units of one currency per unit of the second one. An exchange rate is usually represented as follows: ABC/XYZ However, there are two interpretations of “ABC/XYZ”: (1) The number of units of ABC per unit of XYZ. (2) The number of units of XYZ per unit of ABC. To avoid confusion and misunderstanding, definition/ interpretation (1) will always be used in this course. ******************** Cross rate A “cross rate” is the exchange rate between two currencies calculated on the basis of the exchange rates of these two currencies against a third one. For example, let us assume that we know the exchange rates AAA/BBB and AAA/CCC. The cross rate BBB/CCC is equal to: AAA/CCC divided by AAA/BBB ******************** SECOND PART – APPRECIATION AND DEPRECIATION (1) Definitions Appreciation: The appreciation of one currency against another one between two dates is the increase in the value of the first currency against/compared with the second one. Depreciation: The depreciation of one currency against another one between two dates is the decrease in the value of the first currency against/compared with the second one. (2) The appreciation/depreciation of one currency (for example the EUR against another currency (for example the USD) between two dates is calculated as follows: [(USD/EUR) second date] - [(USD/EUR) first date] ------------------------------------------------ x 100 % [(USD/EUR) first date] Important remark: it is necessary to use here the USD/EUR exchange rates. If the result is positive, that means that the EUR has appreciated against the USD. If the result is negative, that means that the EUR has depreciated against the USD. (3) The appreciation/depreciation of the USD against the EUR between two dates is calculated as follows: [(EUR/USD) second date] - [(EUR/USD) first date] ------------------------------------------------ x 100 % [(EUR/USD) first date] Important remark: it is necessary to use here the EUR/USD exchange rates. If the result is positive, that means that the USD has appreciated against the EUR. If the result is negative, that means that the USD has depreciated against the EUR. (4) Verification The relationship between the appreciation and the depreciation is as follows: appreciation (in %) depreciation (in %) (1 + ------------------- ) x (1 + ------------------- ) = 1 100 100 N.B. In practice, as some exchange rates are rounded, the result of this calculation is not exactly equal to 1. However, if six "significant digits" are used (see the fourth part), this result must begin with: either 1.000, or 0.999. If not, this means that there is at least one error in the calculations. (5) Important remarks (1) For appreciation and depreciation, as for everything else in currencies/foreign exchange, it is essential to use a complete, precise and clear wording. Otherwise, there can be very expensive misunderstandings. (ii) If one currency has appreciated against another one, obviously the second one has depreciated against the first one. (iii) The appreciation is never equal to the depreciation. In addition, the appreciation must be higher than the depreciation. The only exception to these two rules is of course when both appreciation and depreciation are equal to zero. ************************ THIRD PART - THE FORMULA LINKING SPOT AND FORWARD EXCHANGE RATES For a one-year forward rate, this formula is as follows: 1 + [(i)ABC] F = S ------------ 1 + [(i)XYZ] In which: - ABC and XYZ are two currencies. - S is the spot rate ABC/XYZ on a certain day. - F is the one-year forward rate ABC/XYZ on the same day. - (i)ABC is the ABC one-year interbank interest rate on the same day. - (i)XYZ is the XYZ one-year interbank interest rate on the same day. *************************** FOURTH PART – IMPORTANT REMARKS Accuracy, precision, clarity and consistency are essential in business, and particularly as regards currencies/foreign exchange. Consequently (and although the following rules are not always respected in the note "Foreign exchange markets and transactions"!): (1) The wording used for any transaction or for any other purpose must be complete, precise and clear. (2) For all the currencies, the ISO codes must be used. (3) For interest rates, and for all other percentages (bid/offer spread, appreciation, depreciation), it is necessary to use, to calculate and to write exactly two decimals. (4) For amounts, it is necessary to calculate and write exactly two decimals for all the amounts, except of course for amounts in currencies such as the JPY. (5) For exchange rates, it is necessary to: -Chose the source of information with the highest number of "significant digits" (see the definition below. - Always use all the digits shown in the sources of information. - In the calculations, always use at least six "significant digits". - In the results, always write exactly six "significant digits". "Six significant digits" means for example: 0.00123456 (and not 0.001234 - the two zeros after the dot are not "significant digits"). The reason for this number of "significant digits" is the fact that the exchange rates between the euro and all the currencies it has replaced have six "significant digits", for example: BEF/EUR and LUF/EUR: 40.3399. DEM/EUR: 1.95583. FRF/EUR: 6.55957. IEP/EUR: 0.787564. ITL/EUR: 1,936.27. NLG/EUR: 2.20371. Jean Bellemans FINANCE III – PART FOUR - FINANCIAL RATIOS EXERCISE You should calculate the following financial ratios for Colruyt N.V. (a) for the year ended March 31, 2019, and (b) as of March 31, 2019 (see the attached financial statements). (1)The ratios specified in the second attachment (which is from pages 156 and 157 of “Fundamentals of Financial Management” - the textbook for Finance I and Finance II). Important remark: in these ratios, “debt” means “total borrowings”. ************************************************************** (2) The following additional ratios: Total equity to total assets ratio. Trade payables in days. Gross profit margin. Jean Bellemans Attachments: mentioned.